By Khairul Khalid
AmResearch has downgraded Kossan Rubber Industries Bhd due to its limited upside potential, despite its favourable exposure to the US dollar.
“We opine that further upside from its favourable US dollar exposure, which in part spurred the surge in rubber glove stocks (including Kossan’s), may be limited moving forward as the exchange rate appears to have stabilised,” said AmResearch in a report today.
The report also explains that Kossan’s share price has already incorporated its strong earnings growth momentum which had seen a three-year compounded annual growth rate of 22% so far.
“Our downgrade is mainly due to its rich valuations and the limited upside potential to our fair value (+6%) post its strong share price performance this year,” said AmResearch.
According to the report, Kossan’s share price has doubled year-to-date.
“The stock’s rally was in tandem with its peers’ average year-to-date increase of +78%. In comparison, the FBM KLCI (Kuala Lumpur Composite Index) had declined by 5.8% over the same period,” said AmResearch.
AmResearch also said that Kossan’s financial performance for the first nine months of financial year 2015 (9MFY15) results were in line with market expectations.
Yesterday, Kossan posted pre-tax profit of RM70.8 million for the third quarter of financial year 2015 (3Q15) up 56% year-on-year. Revenue for 3Q15 also increased 34% year-on-year to RM441.7 million.
“The significant jump in Kossan’s 9MFY15 bottom line (year-on-year +40%) came on the back of a healthy 28% growth in turnover as the average selling price (ASP) declines (in tandem with lower raw material costs) were outweighed by the sizeable increase in sales volumes (+34%),” said AmResearch.
The report explained that the increase in sales volume was due to the availability of new capacity from its Plants 2 and 3 which began commercial operations in June 2015.
Kossan’s 9MFY15 earnings before interest, taxes, depreciation and amortisation (Ebitda) margin had increased by 1.3ppts (percentage points) year-on-year to 20.5%, surpassing its previous peak of 19% back in financial year 2009/2010.
“The margin expansion can be attributed to the group’s lower input costs, more efficient operations (including high utilisation rates) and improved product mix,” said AmResearch.
AmResearch expects Kossan’s earnings growth momentum to remain intact in the next quarter (4Q15) and to carry through the next financial year 2016 as the company’s new capacities progressively come on stream and its older lines are overhauled.
AmResearch has downgraded Kossan from a “buy” to “hold” recommendation with a revised fair value of RM9.40 per share.
At 11.50am today, Kossan was trading at RM8.87, down 3 sen.
You must be logged in to post a comment.